POWER THE FIGHT: CAPTURING SMART MICROGRID POTENTIAL FOR DOD INSTALLATION ENERGY SECURITY - BUSINESS EXECUTIVES FOR NATIONAL SECURITY
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Power the Fight:
Capturing Smart
Microgrid Potential
for DoD Installation
Energy Security
Fall 2012
2
Prepared by the
BENS TASK FORCE ON MICROGRIDS
Chairman
Robert Catell, former Chairman and CEO KeySpan Corporation and
Chairman of National Grid US
Steering Committee
Paul Bollinger, Jr., Boeing Energy William F. Murdy, Comfort Systems USA*
Norman Chambers, NCI Building Systems, Inc.* Gary Rahl, Booz Allen Hamilton
Mark Gerencser, Booz Allen Hamilton* Eric Spiegel, Siemens Corporation
Rahul Gupta, PwC Jeff Stone, APR Energy
Judy Marks, Siemens Government Technologies Jeff Weiss, Distributed Sun
Don McConnell, The Tarrington Group
BENS Members
Keith Butler, MITRE Tom Noonan, JouleX
Ed DeSantis, PRISM Technologies Inc. Ted O’Shea, ABM Industries
Greg DeSantis, PRISM Technologies Inc. Rear Admiral Mike Shelton, USN (ret.), EMCOR
Andrew Evans, AGL Resources Government Services
Rob Goodin, Goodin McBride, LLP Leslie Sibert, Georgia Power Company
David McDonald, McDonald Foundation Major General David Whaley, USA (ret.), ABM Industries
Dr. Robert McGrath, Georgia Tech Research Institute
Advisors
Dr. Samuel Aronson, Brookhaven National Laboratory David Manning, NYS Smart Grid Consortium
Don Colvin, FedEx Paul Marks, Lockheed Martin
Chip Cotton, GE Global Research Bill McCracken, CA Technologies
Ed Bursk, Siemens Government Technologies Gil Metzger, Lockheed Martin
Alex DeBoissiere, UIL Holdings Corp. Tim Noonan, Boeing Energy
David Dykes, Georgia Power Company Milos Ribic, Expansion Capital Partners
Brad Fiebig, Lockheed Martin Electronic Systems MFC Dr. Bradley Schoener, MITRE
Tim Galpin, Johns Hopkins University Applied Physics Lab Dr. Yacov Shamash, Stony Brook Univ.
Jacob Lamm, CA Technologies Major General Todd Stewart, USAF (ret.), Michigan
Rex Luzader, Power Analytics Corp. Technological University
Fred Lowther, Dickstein Shapiro, LLP
* Denotes Members of BENS Board of Directors
BENS Members are italicized
BENS Task Force
3 WHO WE ARE Business Executives for National Security (BENS) is a nonpartisan, nonprofit organization of senior executives that volunteer time, expertise, and resources to assist defense and homeland security leaders on a variety of national security challenges. OUR MISSION Apply best business practice solutions to our nation’s most challenging problems in national security, particularly in defense and homeland security. ACKNOWLEDGMENTS BENS gratefully acknowledges the expert contributions of our membership, their col- leagues, and their staff. We would also like to acknowledge the assistance received from the Department of Defense as well as the leaders and installation commanders within the U.S. Army, Navy, Air Force, and Marine Corps. Additionally, we would like to thank ACORE, Colorado Springs Utilities, Construction Engineering Research Laboratory, Dahlgren Mission Assurance Division, Dominion Virginia Power, Edison Electric Institute, Hawaiian Electric Company, Georgia Tech Research Insti- tute, Georgia Power, MIT Lincoln Laboratory, the National Renewable Energy Laboratory, and the Perfect Power Institute for the expertise and insights that they have shared. About Us
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PREFACE
This report provides a businessperson’s perspective on the implementation of microgrid technology on domestic
military installations as a means of enhancing their energy security. Microgrids require substantial up-front capital
investment, and overall capital spending on microgrid technologies by the military is expected to reach at least $1.6
billion annually by 2020.
BENS identifies and describes the alternative business models available to the military for the ownership and operation
of microgrids and to assess the benefits and drawbacks of these approaches in terms of access to capital, economic ef-
ficiency, speed to market, energy security, integration of renewable sources of energy and other related considerations.
In the course of its work, BENS has looked carefully at the appropriate size and scope of installation microgrids and
offers recommendations regarding sensible physical boundaries and suggestions as to how the Department of Defense
(DoD) and other government agencies might enhance the energy security and resilience of areas surrounding military
installations in the event of prolonged grid outages caused by natural disasters, malicious attack, or unexpected disrup-
tion. In addition, BENS examined major non-technical impediments to broad microgrid deployment, including disparate
state regulatory environments, military procurement practices, disaggregation of the military’s own organizational ca-
pabilities, and legacy obligations arising from previous utility privatization programs. Finally, BENS provides a financial
modeling tool that allows DoD to quantify the economic value of microgrids at different installation locations around
the country and under alternative business models. This tool is intended to help DoD identify where their deployment
makes the most economic sense.
BENS believes that a concerted and well-organized effort by DoD to roll out microgrid technology on a widespread
basis at its installations in the United States offers important benefits, not only in terms of enhancing the military’s own
energy security but also by exerting broad influence on both the pace of implementation of key energy technologies
beneficial to all citizens and on regulatory policies which today often serve to restrain innovation and efficiency. We
commend the leadership of DoD and the individual military branches for attaching high priority to this initiative, and we
encourage them, Congress and the federal government to work with providers of electricity and related technologies
and services to continue to update and improve system efficiency and resilience.
More than 40 BENS members, their colleagues, and their staffs contributed to this report. We are grateful for their gen-
erous assistance and submit this report to the Department of Defense, and other stakeholders to promote and implement
proficient and effective establishment of smart microgrids on our nation’s most critical military installations.
Robert Catell (Study Chairman) General Montgomery Meigs, USA (Ret.)
Chairman President & CEO
Advanced Energy Research & Technology Center Business Executives for National Security
at Stony Brook University
Preface
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TABLE OF CONTENTS
Executive Summary 6
Introduction 14
Section I
— Financial Modeling of Defense Installation Microgrids 16
Section II
— Analysis of Alternative Ownership/Operation Business Models 25
Section III
— Size and Scope Criteria for Defense Installation Microgrids 36
Section IV
— Assessment of Impediments to Microgrid Development 42
Section V
— Perspectives on Implementation Considerations 51
Appendix 58
Contents
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EXECUTIVE SUMMARY
Nearly 99% of the more than 500 DoD installations nationwide are dependent
on the commercial grid for power.
While the U.S. commercial grid is reliable and resilient, power outages have
occurred with greater frequency in the last decade, leaving installations in-
creasingly susceptible to power loss and mission disruption. Complicating this
problem, many installations are located at the outer reaches of local transmis-
sion and distribution networks, leaving those installations more vulnerable to
power interruption, with longer recovery times.
Fixed military installations are vital to our nation’s security. Loss of their full
capabilities due to outages would diminish our nation’s warfighting potential
in a crisis. Installations, historically springboards for warfighter deployment,
have increasingly become command centers for essential support operations,
as well as staging areas for critical humanitarian and homeland defense mis-
sions. If an installation loses power today, this would not be a merely local
event. Global missions might also be strained.
In 2008, the Defense Science Board highlighted the vulnerability of fixed mili-
tary installations on an aging commercial grid in a seminal report on energy,
More Fight—Less Fuel. Increasingly, military planners seeking to lessen this
national security vulnerability are turning to microgrids.
Executive Summary
7
What is a microgrid? It is an integrated system of electricity Twentynine Palms, LA, Fort Bliss, TX, Fort Sill, OK, and Joint
generation, distribution infrastructure—and, if needed, energy Base McGuire-Dix-Lakehurst, NJ. DoD has also commissioned
storage—that enables an installation to maintain power while a study by the Massachusetts Institute of Technology’s Lincoln
it is disconnected from the commercial electric grid. Along Laboratory to catalog and assess nearly 50 examples of DoD
with energy security, microgrids can be also paired with com- approaches to ensuring the availability of electric power for key
munication and control technology to boost energy efficiency, installation missions. About one-half of those examples deal
as well as promote renewable energy integration to become a with microgrids or “microgrid-like” approaches.ii
“smart microgrid.”
This analysis, conducted by the Business Executives for
DoD views smart microgrids as a “triple play” of National Security (BENS) Microgrids Task Force, complements
benefitsi for military installations: these efforts by focusing on the business factors that influence
the opportunity for smart microgrid development and deploy-
• Increased efficiency for facilities through command- ment. In its analysis, the Task Force examined the potential
control technology that better regulates and distrib- cost and value of various approaches, alternative business
utes power models and financing, the size and scope criteria, and impedi-
• Deployment of renewable energy that helps meet ments for smart microgrid development and implementation.
congressionally mandated goals The Task Force also offers recommendations as enabling
• And, most importantly, energy reliability for fixed actions and steps for DoD to pursue.
installations critical to military operations.
DoD has already partially addressed these concerns about KEY INSIGHTS
installation energy surety with investments in efficiency and • Installation energy security does not require a techno-
renewable energy. DoD has also increased the emphasis on logical breakthrough.
energy efficiency and conservation through the development • Commercially available technologies that can improve
of higher standards for building sustainment, restoration, power surety at a military facility exist today. Develop-
and modernization, as well as energy-efficiency investment ment of energy security solutions, including smart
programs. microgrids, will depend more heavily on the creation
of adequate business models that distribute costs
On the supply side, DoD has increased the development of
and benefits among key stakeholders, while delivering
on-site renewable energy resources, and improved its own
the performance characteristics DoD needs.
expertise as a buyer of renewable energy projects. Renewable
• The appeal of microgrids to third-party financers who
sources of energy may ultimately make an important contribu-
can access capital markets more easily than DoD will
tion to installation energy security by generating electricity
be a critical driver of successful development.
without depending on a supply chain of fuel.
• Smart microgrid development will also depend on
DoD also has made specific progress on microgrids. DoD, for direct government funding that can ensure implemen-
example, established an Installation Energy Test Bed within tation and reduce funding uncertainties in these times
the Environmental Security Technology Certification Program of austerity.
to examine the application of microgrids for the military. This • The cost advantages of third-party financing, and
energy test bed validates emerging innovative technologies development, is significant.
and invests in further developments that can quickly make • Most microgrid projects will require the creation of
microgrids or smart microgrids suitable for installation use. new power sources on the installation. Capital cost
The Installation Energy Test Bed has funded ten demonstra- for the new generation assets greatly drive project
tions of microgrid technologies, and is testing technologies economics rendering most projects that involve full
from multiple vendors at installations nationwide including government ownership and operation of these as-
among others, Marine Corps Air Ground Combat Center sets more costly – 20% or more – than approaches
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that take advantage of third-party financing. Many At many installations, microgrids may operate at an increased
third-party opportunities will also involve renewable cost to DoD, at a “security premium.” The security premium
generation, which has experienced significant price for installation power surety needs to be further explored by
declines. The growing abundance of natural gas is DoD to justify increased cost at specific locations. Nationwide,
another significant factor. One of the most effective the “most economic portfolio” of energy security solutions will
existing energy security solutions observed by the likely include privately financed microgrids, other arrange-
Task Force was the energy system using a natural gas ments with utilities serving DoD’s bases, and government-
peaker plant at Robins Air Force Base. financed solutions.
A higher percentage of DoD installation microgrid projects
FINANCIAL MODELING of SMART would be economically advantageous if they included both
MICROGRID APPROACHES new generation and demand-side services (energy efficiency
The Task Force developed a financial modeling tool that il- and ancillary services) in a “bundled” project implementation.
lustrates the potential cost and value of various possible smart DoD’s historical approach to demand-side services has been
microgrid approaches at installations nationwide. Using this decentralized and performance data from previous investments
modeling tool, the Task Force concluded that microgrids with is not broadly available, so it is difficult to comprehensively
significant renewable generation assets can be achieved at quantify the impacts of these services. However, the experi-
reduced annual energy costs to DoD, but that these projects ence of Task Force members strongly suggests that the cost
are heavily dependent on the locations of the installation and savings from such demand-side services (energy efficiency, in
access to third-party capital. Such circumstances are currently particular) could be of a similar range to those from new gen-
available in only a handful of States. eration development using third-party approaches (15-20%).
DoD should explore approaches to identify and include these
As an example, Joint Base Pearl Harbor-Hickam in Hawaii potential savings from demand-side services in microgrid
could lower their annual energy costs by several million development projects.
dollars a year, and become 50% renewable, through a power
purchase agreement with an independent power producer.
This approach would provide several million dollars in annual ALTERNATIVE BUSINESS MODELS AND
savings that could be leveraged to pay for other needed capital FINANCING
improvements to the installation’s energy system, including its Another factor DoD must consider is the ownership and opera-
smart microgrid. tion of a smart microgrid and its implications for capital invest-
ment, operational responsibility, and economics. The spectrum
In total, the Task Force determined approximately 25% of
of these models range from:
domestic installations can implement smart microgrid projects
that would reduce annual energy costs. • Government-owned, government-operated
• Government-owned, contractor-operated
In general, these installations are located in States with higher-
• Contractor-owned, contractor-operated1
than average current electricity prices that may represent
approximately $1.5 billion of DoD’s total annual installation Most projects that involve government ownership of capital-
energy cost. If the modeling of Joint Base Pearl Harbor-Hickam intensive generation assets are more costly than approaches
is indicative, reductions in annual energy cost of 15-20% are that take advantage of third-party financing opportunities that
possible, meaning DoD could achieve net savings on the order employ a contractor-owned, contractor-operated model, or a
of $225 million annually from development of microgrids at
appropriate installations.
The implications of each of these models are discussed in Section II.
1
Executive Summary
9
hybrid government-owned, government-operated model that fenceline of an installation, DoD directly enters the realm of
captures tax and subsidy benefits. existing electric utilities. A community-scaled microgrid would
be inherently excessive – raising electricity costs to consumers
Before the most favorable ownership/operation arrangement – and creating a new “electrical boundary” in a community that
for individual on-base infrastructure can be determined, DoD raises equity and safety issues. The relationship of the installa-
needs more insight into on-base electricity management. It tion to its current utility poses the most direct challenge to the
is clear, however, that DoD can institute specific actions to adoption of an oversized microgrid.
maximize the value it receives from capital markets. Chief
among these is the adoption of a Levelized Cost of Secure En- Second, at the size needed to capture significant cost benefits
ergy metric that incorporates both the levelized cost of energy from economies of scale – which our analysis shows is at 10
concept commonly used in commercial transactions, and the times an installation’s annual energy use – the microgrid ceas-
costs of on-base infrastructure improvements required to make es to be a microgrid. Extending a microgrid to cover commu-
an installation ready for a smart microgrid. nity needs at this scale likely implies a more complex network
of generation assets, substations, transmission and distribu-
tion lines, as well as microgrid management technology and
SIZE AND SCOPE CRITERIA of SMART even customer billing systems. At this level, a microgrid is
MICROGRIDS really operating more like the commercial grid itself. And due
The size and scope of an installation smart microgrid in to its increased footprint, it would become vulnerable to a
relation to its adjacent community will also become a factor greater range, frequency and magnitude of service disruption
as DoD moves forward in development. There are legitimate risks. Expanded grids could also entangle DoD in state utility
mission assurance interests for providing power beyond an regulation, which could be major obstacle to the cost-effective
installation’s physical boundaries, as well as a potential saving operation of the microgrid.
of project cost through economies of scale, and the selling of
power back to local utilities. For these reasons, the Task Force believes DoD should care-
fully explore non-microgrid solutions that meet its mission
Many technologies used in the development of microgrids, assurance objectives beyond the installation boundary.
such as energy generation, could also benefit from larger de- Encouraging commercial smart grid investment nationally,
velopment because they marginalize capital cost. Greater size promoting net metering in the community, and establishing
could enable an installation to assist with homeland defense regional power restoration contingency plans and equipment
operations in times of crisis by powering essential public are examples of more effective, alternative solutions.
infrastructure like water and sewage treatment plants. More-
over, available power from an oversized grid could address
the overarching concern that current federal emergency power NON-TECHNICAL AND TECHNICAL
restoration capabilities and approaches are not effective in IMPEDIMENTS for SMART MICRoGRIDS
meeting future emergencies stemming from catastrophic out- There are both non-technical and technical impediments to
ages caused by major storms, natural disasters or cyber attack. microgrid development.2
Unfortunately though, as discussed in Section III, the challenges The principal non-technical issues that may impede microgrid
and obstacles to creating large, community-scale smart micro- deployment fall into four main areas: prior electric utility
grids outweigh these positive benefits for two main reasons: privatization actions within DoD, state utility law and regula-
tion, alignment of DoD acquisition processes with commercial
First, utilities already have an obligation to serve everyone
in the community. By extending electrical service beyond the
See Section IV.
2
Full government ownership and operation can be
20% more costly than third-party financing.
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norms, and the aggregation of relevant installation energy lasting means of gaining power surety is to renovate the current
management efforts within DoD. The principal technical issues electrical infrastructure with new technology.
include elevated electrical shock hazards, ability to parallel
To that end, the most significant obstacle to development are
with the local utility, and diminished power quality.
the non-technical impediments arising from DoD itself.
Largely, these impediments exist because smart microgrids
DoD’s utility privatization program could limit the level of
represent a paradigm shift in both the role of electric power
renovation sought by installation managers, DoD’s acquisition
in military operations, and the relationship between DoD
process, and disaggregation of installation energy initiatives.
installations and the commercial grid. In the past, electricity
DoD can best address these impediments by simultaneously
was viewed as a relatively simple commodity, and DoD as a
increasing its own learning around smart microgrid develop-
cumulatively large, but otherwise straightforward customer. In
ment (sizing and local business models), and engaging with
the new paradigm, power surety at installations is increasingly
national-level stakeholders.
critical to military activities and the most cost-effective and
CONCLUSIONS
Smart microgrids are a watershed opportunity for DoD. Along with technological benefits that improve on-
site energy efficiency and integration of sustainable renewable energy sources, smart microgrids provide
the level of energy security military commanders need to maintain full operation. The commercial grid is
experiencing more frequent and longer-duration outages and installation reliance on the commercial power
grid has become a vulnerability. Neither DoD, nor the electric power or finance industries, are fully ready to
meet these challenges, but all of these key stakeholders have begun to come together to resolve them.
DoD has made strong progress and achieved impressive initial milestones in installation energy management.
Utilities and their regulators are beginning to see the potential of partnering with DoD. And the finance sector
has many participants who are actively seeking productive ways to deploy capital to accelerate activity.
Executive Summary11
RECOMMENDATIONS
DoD should establish energy security requirements for Defense
Installations.
A common energy strategy that highlights energy security on For a DoD smart microgrid strategy, it should establish a com-
an installation as paramount would set the foundation for DoD mon basis for system design that clearly defines “efficiency”
and the Services. By clarifying purpose and strategy toward and “effectiveness” requirements for the adequacy of a smart
procuring and sustaining installation energy, a “design basis” microgrid. The BENS Task Force believes an effective smart
can be established that determines how much energy security microgrid must have four key characteristics:
is worth at each installation so that system designers can de-
1. An ability to disconnect from the commercial grid and
velop systems with clear knowledge of the type of threats and
restore power without relying on the external electric
duration of outage their designs need to anticipate. Costs of
power transmission network.
a secure microgrid system will inevitably vary by installation.
2. An ability to integrate renewable energy.
DoD needs to determine the critical mission supported by each
3. Sustainability for periods measured in weeks or months,
installation and the amount it is willing to spend to ensure a
not days.
specific installation is always fully operational.
4. An ability to withstand cyber attack.
DoD should determine an organizational approach toward smart microgrid
development that supports timely decision making.
If implementation of microgrid policy is delegated to each of program. Several different approaches include creation of a
the military departments, variability of circumstances at each separate implementation office within Office of the Secretary of
installation is likely to drive very different decisions in the Defense, designation of an Executive Agent, or establishment
design and acquisition of microgrids, an added complexity of a joint program executive office. Whatever approach is taken,
that could affect cost. Industry providers are likely to encounter it is essential that the centralized authority has the resources –
very different technical bases for microgrid designs, and very fiscal and human capital – procurement authority, and techni-
different acquisition timelines, processes and selection criteria cal acumen needed to be a responsive, sophisticated customer
across the military departments. This kind of approach is for industry. A streamlined decision and approval processes
unlikely to capitalize on the best value industry can deliver. for project selection, with technical and procurement authority
centralized within DoD focused on microgrid development,
DoD should consider centralizing the procurement and techni- would spur greater competition amongst investors and ensure
cal authorities needed to execute a microgrid development DoD receives its greatest value for its investment.
DoD should begin a dialogue with leadership from key sectors – electric
power and finance – to build model agreements that support microgrid
design, operations, and investment.
The level of interest of electric utilities in microgrids of and apprehension in the approaches DoD might take. Similarly,
depends on their local grid conditions. The National Associa- the finance industry sees possible opportunity in productively
tion of Regulated Utility Commissioners (NARUC), in passing deploying capital to develop microgrids, but is unclear on how
its referendum on Defense microgrids, expressed both interest DoD will acquire them, and what rules apply. DoD should initiate
Executive Summary12
or reengage with the leadership in these sectors to develop mi- and reduce the degree of variability in microgrid architecture and
crogrid concepts that will support ideal agreements and terms, contract parameters across the DoD installation portfolio.
DoD should use Congressional testimony and outreach to describe the
benefits of legislative changes that would remove impediments to
investment in smart microgrids and to expand the pool of investors.
Seeking regulatory and legislative provisions that support cost- constraints make funding for microgrid development difficult,
effective smart microgrid development nationally would also and therefore require investment from beyond DoD’s traditional
aid in DoD’s efforts. For example, provisions like the expansion funding streams like direct congressional appropriations. Pri-
of real estate investment trusts for energy purposes and the use vate financing, including investment from utilities, allows DoD
of alternative fuel sources that some Services do not consider, to push large investment cost burden to willing third parties
like natural gas, should be pursued. Current and future budget that can develop new energy technologies quickly.
DoD should shift future investments away from research into smart
microgrid technology, focusing on applying knowledge to the development,
testing, and evaluation of at-scale smart microgrids under varying
business model environments.
DoD needs to increase its insights and capabilities regarding portfolio is complex and diverse and some of the challenges to
microgrid development, with particular emphasis on business smart microgrid development will not be recognized until full
models. The Task Force is confident simultaneous learning development is occurring. Many aspects will be seen through
and implementation is the most effective approach. The DoD practice and experience, not analysis.
Executive Summary13
Approximately 25% of domestic military
installations can lower their annual energy
costs with a smart microgrid solution.
DoD should pursue 6 to 8 at-scale microgrid development projects as a test
and evaluation program.
DoD needs to gain key insights into how alternative tech- DoD installations within the United States have taken on
nological choices influence the development of successful increasingly direct and real-time roles in military operations,
microgrid business models. It also needs to develop multidis- a trend that is likely to continue. The nature of these roles de-
ciplinary capabilities (acquisition, finance, engineering, law, mand levels of power surety for installations greater than ever
business analytics) needed to successfully envision, analyze, before, while making the vulnerability in near-total reliance
and negotiate the development of a successful DoD microgrid installations on the commercial electric power grid unaccept-
with the full range of industry participants in the separate able. The commercial grid serves installations well today and,
States. over the next decade, “smarter” technologies hold promise to
improve the resilience and reliability of the grid even further.
Development of smart microgrids requires significant upfront
capital for DoD to upgrade its installation’s distribution The commercial power grid will evolve, and in the course of
networks. To attract this capital, accelerated development of this evolution will create opportunities for DoD to realize the
microgrids would lower market costs for the new technol- triple play of benefits – security, efficiency, and renewables
ogy, as well as incentivize direct, private investment into new – that smart microgrids can offer at its installations. As this
energy technology projects at individual installations. report highlights, what’s needed is a greater focus by DoD – on
both its internal capabilities, and externally with an expanded
Speed to market is very important when negotiating a develop-
set of key stakeholders — to develop business models that
ment deal with a commercial third party because each party is
work for all involved.
simultaneously accessing capital and sourcing materials for
other government or non-government proposals. Each microgrid The recommendations of the BENS Task Force in this report, if
project is subject to variable priced market constraints, and any implemented, will enable DoD to be ready for these opportuni-
delay in the final contract and start date would push the third ties, leveraging its accomplishments, and placing it on a new
party to pursue more near-term projects. trajectory to a more secure future.
Executive Summary14
Nearly 99% of the more than 500 installations
nationwide depend on the commercial
electric grid.
Introduction
Military installations today rely almost exclusively on the commercial
grid for electricity. Nearly 99% of the more than 500 installations
nationwide depend on commercial energy and transmission for daily
electrical power.iii While the commercial grid is reliable and resilient,
the military’s reliance on that grid creates vulnerability to power loss
from natural disasters, human error (as seen in the 2003 Northeast
blackout), or worse, a man-made attack. Loss of power hampers
continuity of military operations. For the critical infrastructure behind
military missions, this vulnerability could pose serious risk to na-
tional security.
Fixed installations today are vital to our nation’s fighting edge. They are
no longer mainly spring boards for our warfighters to deploy. Rather,
they are increasingly command centers for essential support operations
down range and platforms for critical humanitarian and homeland de-
fense missions. Loss of their full capabilities diminishes our warfighting
potential and ability to recover in times of crisis.
To address this vulnerability, the Department of Defense (DoD) plans to
invest heavily in microgrid technology designed to supply continuous
power in the event of grid failure. DoD microgrid investment is esti-
mated to reach $1.6 billion annually by 2020.iv15
Moreover, DoD foresees microgrids coupled with intelligent Smart microgrid development is also a systems approach that
energy technology as a way to increase energy efficiency on allows DoD to meet energy, environmental, and security goals
installations and integrate on-site renewable energy sources. simultaneously. While current energy projects help DoD meet
Microgrids with intelligent energy technology, or “smart renewable energy and greenhouse gas reduction targets, they
microgrids” – with the ability to disconnect from the commer- do not yet provide energy security. Efficiency projects help
cial grid and distribute power as needed to support operations reduce annual energy costs and meet efficiency targets, but
on base – can dramatically improve the reliability of power to do not provide security either. If energy projects going forward
military installations, and allow them to operate continuously used smart microgrid integration as its foundation, DoD could
and independently during extended power outages. pursue efficiency and renewable use while also providing
energy security to an installation.
Along with reliability, smart microgrids improve the quality
of power and reduce the loss revenue from power quality. In this report, Business Executives for National Security (BENS)
Billions of dollars in annual loss is attributed to insufficient brings a business focus to the microgrid opportunity.
power quality.v
BENS Business-based focus has two dimensions:
First, highlighting microgrids’ costs and their sources of economic value, as well as
the business model(s) that could most effectively allocate these costs and values to
drive microgrid deployment.
Second, as leaders of business enterprises, we offer observations on impediments
to microgrid deployment, and organizational and strategic approaches to overcoming
them.
Energy security on an installation is not primarily a technology be appealing to third-party developers who can access capital
challenge. Commercially available technologies exist that can markets more easily than the department. Absent such a
provide the energy security DoD requires. DoD has made many business case, smart microgrid development will depend on
investments in research and development of microgrid-related direct government funding that will delay implementation and
technologies, and has a strong understanding of relevant introduce funding uncertainties.
technologies.
Given the right circumstances, third-party investment can be
The development of smart microgrids on military bases will be spurred and capital cost for smart microgrid development can
to a large degree determined by whether an adequate busi- greatly diminish. These circumstances are currently avail-
ness model can be developed that will deliver the performance able in a handful of States, but DoD, given its size, is well
sought by DoD at its installations and at an acceptable cost. positioned to successfully advocate to similar third-party
For DoD to implement smart microgrids on its installations investment-friendly areas nationally.
as quickly as possible, the business case for microgrids must16
Section I
Financial Modeling of Defense
Installation Microgrids
Central to a business focus on microgrids is an understanding of both the costs and sources
of economic value microgrids offer. Solutions for providing energy security on a military
installation fall along a spectrum of microgrid models with particular costs and values.
At one end of this spectrum is the provision of emergency electric power on a building-
by-building basis through the use of backup generators. This is the most prevalent emer-
gency power solution provided on military installations today. Because these generators
are generally not connected to one another or integrated with the commercial grid, they do
not create economic value beyond the installation on which they are deployed. As a result,
their entire cost (procurement, operations, maintenance) is borne entirely by the DoD.
At the other end of the spectrum is the fully utility-integrated, smart microgrid which, in
addition to providing secure power to an installation through on-site generation and distri-
bution, offers benefits that have economic value beyond the installation fenceline. These
benefits can include: provision of needed additional generation, enrollment in demand-
response programs, and for those installations located in wholesale electricity markets, the
selling of energy efficiency or ancillary services that help improve grid stability and opera-
tion. In between these two poles is an enormous variation of partial energy security ap-
proaches, many of which are represented in DoD’s portfolio of military installations.17
The BENS Microgrid Task Force developed a financial model- lated energy cost for an installation will be a combination of
ing tool to help illustrate the costs and value of approaches to electricity price and the microgrid operating cost. The tool also
energy security along this spectrum. The financial modeling determines capital expenses of a microgrid based on generators’
tool uses scenario analysis to assist in understanding the value overnight cost, cost of the microgrid, and cost of different de-
of a microgrid project. The inputs to the model are based on mand programs (e.g. energy efficiency and demand response).
DoD-supplied data or reasonable estimates from industry prac- The tool has the ability to fill-in predefined data for solar and
tice or experience, and broadly cover three areas: (i) system wind generation profiles based on an installation’s geographic
requirements, (ii) operating characteristics and cost, and (iii) location. The modeling tool accommodates as separate inputs
market dynamics. microgrid generators that might be owned by DoD and those that
might be owned by a third party, such as an independent power
The system requirements for the microgrid include charac- producer (IPP) or a utility. In the latter cases, a military installa-
terization of load (time profiles of load) and its priority (e.g., tion will use one of its statutory authorities (e.g., for enhanced
mission critical load that is always on, high-priority load that is use leasing, or entering into a power purchase agreement) to
interruptible for short periods of time and low priority load that structure an agreement with the third party. As a result DoD
is interruptible for longer periods of time). The annual hourly would not be responsible for capital investments and operating
demand is used to determine generation economic dispatch and maintenance costs. In the examples that follow, all of these
for each hour during the year. The tool provides different third parties are described generally as IPPs.
options of supplying load at a military base. Electric power
can be supplied from a number of options and combinations: The market dynamics area includes potential of demand
A grid (utility or load serving entities), from one or more response programs, electricity pricing and market structure
distributed (microgrid) generator locations at the base, and/or and cost of undelivered energy—the cost impact to the instal-
backup generators. lation of a power outage. The tool allows electricity price to be
defined as a retail price or as a locational marginal price (if a
The operating characteristics of the microgrid include: Electri- base has access to the wholesale electricity market). The tool
cal capability of generation and back-up generators, generator has ability to fill-in predefined data for electricity prices based
type, and physical limits of generators. Together with operation on an installation’s geographic location. In addition, the model
and maintenance (O&M) costs, these characteristics are used allows the assumption that the installation has an option to sell
to determine the operating cost of the microgrid. The calcu- excess power back to the grid.18
Table 1
Microgrid Financial Modeling Tool
The financial modeling tool includes three different situations tion at a cost that is the same or lower than current expendi-
linked together to quantify potential value derived from a hypo- tures for electricity with increased security. The model does
thetical microgrid project. The possible operational situations not include additional expected savings from implementation
include: of demand-side management activities (particularly energy
efficiency). Although DoD has made significant accomplish-
• Arbitrage (i.e., routine buying and selling of power or ments in this area, program implementation has been largely
demand management for economic gain) decentralized and reliable performance data is not widely
• Self sufficiency of the microgrid for short-term out- available. The experience of Task Force members strongly
ages (2 weeks) suggests that cost savings from such activities could positively
• And, self sufficiency of the microgrid for long-term impact project economics, and should be part of location-
outages (1 month and 6 months). specific microgrid feasibility analyses.
The output of the financial tool presented in this report is a While conducting this study, the BENS Microgrid Task Force
comparison of one or more microgrid cases to the status quo visited nearly a dozen military installations, and considered
in terms of annual electricity costs for a given installation. available data from multiple others. To illustrate the financial
The outputs of the model are not suitable for engineering modeling tool, the Task Force presents sample model outputs
a microgrid at a specific installation, but is very helpful in from three installations: Joint Base Pearl Harbor-Hickam, HI;
characterizing the likelihood that particular high-level business Fort Bragg, NC; and, the U.S. Air Force Academy, CO. We also
models (i.e., leveraging third-party capital) and technical ap- provide a description of an energy security solution in place at
proaches (i.e., renewable vs. other generation) can be brought Robins Air Force Base, GA.
together at a specific installation to achieve a microgrid solu-19
Joint Base Pearl Harbor-Hickam (JBPHH), Hawaii
JBPHH in Hawaii is located in a site that is very favorable in which the annual energy cost to the base is reduced 15 to
for renewable energy generation. There is an abundant solar 20%. The scenario depicted relies upon a third-party capital
resource, sufficient biomass availability, and strong financial provider (Independent Power Producer – IPP), with renewable
incentives provided by the state of Hawaii. Additionally, the sources providing 50% of the power needed for the base under
commercial grid on the island of Oahu experiences outages on an assumed 20-year power purchase agreement. An alterna-
a regular basis, and the price of electricity from the grid is the tive scenario, the middle bar, also is depicted in the figure. It
highest in the United States. portrays a comparable project financed solely through DoD
funding. The scenario results in higher annual costs despite
The financial modeling tool was used to compare current oper- annualizing the capital costs over the same 20-year period.
ations at the installation to a hypothetical future microgrid that Both scenarios account for improvements to the electrical
uses various combinations of three on-site generation assets: infrastructure that facilitates microgrid operations, but as stated
Diesel generators, solar photovoltaic arrays, and a biomass earlier, these estimates do not reflect a specific engineering
plant. One output of the model is portrayed in the figure below. analysis.
As the Figure 1 depicts, there is a least one microgrid scenario
Joint Base Pearl Harbor-Hickam
Figure 1 Scenarios
Joint Base Pearl Harbor-Hickam Scenarios
200
Annual Capitalized Cost for Solar
Annual Cost [million $]
Annual
150
Capitalized
Costs for
Biomass
100
50
0
Current Energy Cost Cost of New Energy & Cost of New Energy &
No Microgrid Microgrid w/out IPPs Microgrid using IPPs
50% Renewable 50% Renewable
Notes:
• All cases use back-up generators only during an outage
- • IPP
All Microgrid
cases usecaseback-up
assumes generators onlythat
a 20 year PPA during an outage
buys solar electric energy @ $185/MWh and biomass electric energy @ $215/MWh
• Solar
- 14%IPP Microgrid case assumes a 20 year PPA that buysand
IPP uses federal incentives – corporate tax credit (ITC) is able
solar to achieve
electric 20 percent
energy return on and
@ $185/MWh capital investments
biomass overenergy
electric 20-year@period and WACC =
$215/MWh
- • Bio
Solar
IPPIPP
usesuses federal
federal incentives
incentives – corporate
– corporate tax credittax credit
(ITC) (ITC)
and PTC. It isand
ableistoable to achieve
achieve 20return
20 percent percent
on return on capital investments
capital investments over 20-year
over 20-year period with WACC
=period
14% and WACC = 14%
• Microgrid cost: $5 million (includes: SCADA, remotely controlled equipment, AMI; does not include T&D infrastructure upgrade)
- Bio IPP uses federal incentives – corporate tax credit (ITC) and PTC. It is able to achieve 20 percent return on capital investments over
Note: IPP calculation produced negative income tax for some years. It is assumed that these losses will be rolled up to higher company levels.
20-year period with WACC = 14%
- Microgrid cost: $5 million (includes: SCADA, remotely controlled equipment, AMI; does not include T&D infrastructure upgrade)
- IPP calculation produced negative income tax for some years. It is assumed that these losses will be rolled up to higher company levels.
Sources: (1) SNL Financial Database (2) Ventyx Velocity Suite Database20
Fort Bragg, North Carolina
Like JBPHH, Fort Bragg has access to solar and biomass re- energy costs very similar to the renewable scenario (but still
sources sufficient to provide power for its needs. The incentive higher than the base case).
programs in North Carolina, however, are not nearly as strong as
in Hawaii, electricity prices are lower, and grid performance is With no microgrid scenario resulting in lower annual energy
more reliable. In the renewable-based scenarios examined for costs, it is nonetheless possible to estimate the increased cost
Fort Bragg, the reduced level of state support resulted in higher for the added energy security, or “energy security premium”
annual energy costs than the status quo, or base case. Because for each scenario – the additional cost incurred to achieve
of this, we also examined the economics of entering into a power surety. In the scenarios considered above, these values
20-year power purchase agreement with an IPP for an on-base are $5.95 Million/yr (renewables from IPP), $6.85 Million/
natural gas microgenerator. Although natural gas does not enjoy yr (natural gas from IPP), and $29.67 Million/yr (renewables
the support of incentive programs, and does not provide the using DoD funding). In context, these are 16-19% increases
black-start advantages of renewable sources for longer-duration above the base case for the IPP scenario, and an 80% increase
outages, the current low price of natural gas results in annual for the DoD-funded scenario.
Figure 2
Fort Bragg Scenarios
Notes:
- All cases use back-up generators only during an outage
- IPP Microgrid case assumes a 20 year PPA that buys solar electric energy @ $170/MWh and biomass electric energy @ $70/MWh, and
natural gas @ $83/MWh
- Solar IPP uses federal incentives – corporate tax credit (ITC) and is able to achieve 20 percent return on capital investments over 20-year
period and WACC = 14%
- Bio IPP uses federal incentives – corporate tax credit (ITC) and PTC. It is able to achieve 20 percent return on capital investments over
20-year period with WACC = 14%
- Microgrid cost: $5 million (includes: SCADA, remotely controlled equipment, AMI; does not include T&D infrastructure upgrade)
- IPP calculation produced negative income tax for some years. It is assumed that these losses will be rolled up to higher company levels.
Sources: (1) SNL Financial Database (2) Ventyx Velocity Suite Database21
U.S. Air Force Academy, Colorado
The U.S. Air Force Academy represents a very different envi- Bragg. This is expected, given the mission of the Academy in
ronment from the first two examples. Its location in Colorado comparison with these other bases.
has very strong solar and geothermal resources, as well as lim-
Similar to Fort Bragg, no microgrid scenario resulted in lower
ited wind and biomass, and the state offers strong incentives
annual energy costs because the price of the power purchase
for renewable development. The current price of electric power
agreement is higher than the current utility price. The estimat-
for the Academy, however, is very low, and service is highly
ed additional cost for the increased energy security is about
reliable. (Additionally, the state’s mandated renewable goals
$1.3 million per year or about a 30% increase from current
are often oversubscribed, but this factor was not considered
energy costs.
in the analysis). The total annual demand for electricity at the
Academy is also considerably lower than at JBPHH or Fort
Notes:
USFigure 3
Air Force Academy Scenario - Both cases use back-up generators only during
US Air Force Academy Scenario an outage
• - Electricity
Both cases use back-upprice $0.0572/kWh
generators only (peak hours) and
7 Annual during an outage
Capitalized $0.0321/kWh (off-peak hours)
• Electricity price $0.0572/kWh (peak hours)
Costs for - $0.0321/kWh
and Peak demand 17.2
(off-peak MW
hours)
6
- Base load demand 10 MW
Annual cost [million $]
Microgrid • Peak demand 17.2 MW
• - load
Base Critical
demanddemand
10 MW 1.34 MW
5 • - Back-up:
Critical demand 1.34 4.48
MW MW (diesel) @ $140/MWh and
• Back-up: 4.48 MW (diesel) @ $140/MWh and
$7.4/kW-year
$7.4/kW-year
4 • - Microgrid:
Microgrid: 6.53 @MW
6.53 MW (solar) (solar)
$10/MWh and@ $10/MWh and
$0/kW-year
$0/kW-year
• Undelivered energy cost for critical demand
3 - Undelivered energy cost for critical demand
$120/MWh
• $120/MWh
Undelivered energy cost for non-critical
2
- Undelivered
demand $30/MWh energy cost for non-critical
• IPP: 1.34 MW (gas) @ $120/MWh and $0/kW-
year
demand $30/MWh
• - IPP:to1.34
IPP is able MW
achieve (gas) return
20 percent @ $120/MWh
on and
1 capital$0/kW-year
investments over 20-year period with
WACC = 14% and operating the unit 24/7
•
- IPP is able to achieve 20 percent return on capital
Microgrid cost: $3 million (includes: SCADA,
0
Current Energy
Base caseCost Microgrid case
Microgrid Case investments
remotely over 20-year
controlled equipment, period
AMI; does not with WACC =
include T&D infrastructure upgrade)
No Microgrid 14% and operating the unit 24/7
• Total annual energy cost increases ~20%. Energy cost - Microgrid cost: $3 million (includes: SCADA,
increase because of the PPA. remotely controlled equipment, AMI; does not
• PPA provides uninterrupted supply (24/7) to the include T&D infrastructure upgrade
critical load during the year. Sources: (1) SNL Financial Database (2) Ventyx
• Undelivered energy cost decreased 24%. Velocity Suite Database22
Robins Air Force Base, Georgia
Robins AFB has a unique energy security system. In an innova-
tive arrangement, the installation provides its utility, Georgia
Power Company, with land to site a natural gas peaker plant
that supports the utility’s operations in exchange for dedicated
power in case of local outage. Georgia Power paid for and
operates the plant. Robins AFB and the utility have oper-
ated this plant and the installation’s electrical infrastructure
in an islanded mode successfully. The peaker plant is able
to operate using either natural gas or diesel. An estimated 2
to 3 week supply of diesel fuel is stored on base should an
extended outage also disrupt the supply chain for natural gas
to the installation. The Robins AFB example is not a case of a
fully utility-integrated microgrid that delivers power as well as
demand-side services on a nearly real-time basis. But it is a
strong cost-effective energy security solution for the specific
context of the installation.23 Conclusions from the Financial Modeling of Installation Microgrids DoD currently operates more than 500 fixed installations across the United States. Against this portfolio, we recognize that drawing con- clusions on the basis of several site visits and scenario analyses can be misleading. However, based on all of the data the BENS Microgrid Task Force reviewed in its site visits and briefings, and the results of multiple evaluations conducted, we have a high degree of confidence in the following conclusions: 1) DoD installation microgrids with significant renewable generation assets can be financially beneficial: As seen in the analysis of Joint Base Pearl Harbor-Hickam, a microgrid powered by a high-level of renewable sources (50% in this case) can result in a higher level of power surety for the base at reduced annual energy cost to DoD. Using the financial model tool, we have determined approximately 25% of domestic installations can implement smart microgrid projects that would reduce annual energy costs. In general, these installations are located in States with higher-than average current electricity prices that may represent approximately $1.5 billion of DoD’s total annual installation energy cost. If the modeling of Joint Base Pearl Harbor Hickam is indicative, reductions in annual energy cost of 15% are possible, meaning DoD could achieve net savings on the order of $225 million annually from development of microgrids at these installations. This conclusion is important because of the unique black start capabilities that renewable sources potentially provide installations in the case of an extended outage. 2) The economics of microgrid projects are heavily dependent on specific locations of installations: Just as the Pearl Harbor example showed positive financing of a renewables-focused microgrid, Fort Bragg showed the inability of a renewables-focused (or natural gas-focused) microgrid to drive an energy security solution that also reduces an installation’s annual energy budget. On the other hand, the availability of land at Robins AFB, and the installation’s location on the grid, provide for an alternative energy security solution using peaker plants. The major factors that affect project economics are location-specific: State incentives for renewable generation, the quality of available
24
24
renewable (or even possibly non-renewable) resources, the cost of electricity, and the current stability and adequacy
of the local grid. Through its existing renewable energy efforts, DoD has grown significantly in its understanding of
some of these factors. The Task Force developed a prioritization framework that brings a comprehensive set of factors
together, and provides it in the Appendix for DoD consideration.
3) Many DoD installation microgrids will operate at a “security premium” that DoD needs to explore further: The Fort
Bragg example highlighted that many microgrid solutions will result in a higher annual cost of energy than some
installations are currently paying. The difference in cost will constitute a premium that DoD should be willing to pay to
ensure continuous power to the missions, particularly critical missions, at the installation. In the Fort Bragg example,
the minimum security premium was 16 to 18% above current energy costs. In the course of this study, the BENS
Microgrid Task Force came across other values for this security premium. For example, the microgrid for the National
Interagency Biodefense Campus at Fort Detrick delivers electricity that is over 150% more expensive than the utility-
provided power to the installation. The development of a more complete situational awareness of the economics of
backup generation currently in use at DoD installations, combined with consideration of the criticality of missions
at specific bases, and the costs of alternative microgrid approaches, will all enable DoD to develop a specific policy
regarding the idea of a security premium.
4) A “most economic portfolio” of DoD installation microgrids would likely be a combination of technologies and business
relationships with serving utilities: Even the limited number of examples described above demonstrates the diversity
of circumstances (technical, economic, and regulatory) across the DoD portfolio of over 500 installations. If project
economics were heavily weighted as the factor driving the specific microgrid design selection, there would be no
single template that would emerge as a “typical” DoD installation microgrid. The BENS Microgrid Task Force finds
this to be an inevitable outcome given the diversity already inherent in the portfolio of installations. This situation
drives management, organizational, and strategic considerations for decision-making that are explored further in
later sections of the report. However, the incorporation of microgrids into the DoD energy portfolio of efficiency and
renewables is of paramount importance if energy security is to be achieved. Meeting current Federal energy goals
will not provide the desired or necessary energy security to support critical missions without smart, secure microgrid
technology. In this respect, the definition of energy security by DoD and the inclusion of microgrids in this equation
is an important first step towards addressing the Defense Science Board’s (2002 and 2008 energy reports) critical
observation of DoD’s current installation energy posture.You can also read
